Morgan Stanley raises outlook for European banks
Morgan Stanley has upgraded its industry view on Europe's banking sector from underweight to neutral, saying valuations may have fallen far enough and the stocks may benefit as investors shift funds away from commodities.
"We no longer have the same degree of conviction that we should be shorting the banks as a sector today," the analysts wrote in a research note.
They emphasised they remain "bearish on many fundamentals" affecting stock prices, such as capital raises, asset disposals, dividend cuts and higher credit costs, and said more deleveraging will still be needed.
However, "valuations are already back to early 90s and most banks are trading near our bear values. Unless our bear cases become the base or bullish cases due to widespread systemic issues, we feel much is now priced in."
Second quarter results look "OK so far," the analysts said. "Whilst the underlying trends are poor...the earnings power of the US banks which have reported is very modestly better than Q1 from margin expansion and better trading results," the note said.
The banking sector will benefit as the commodities sector softens, the analysts wrote. Moreover, inflation is likely to peak in the third quarter, which should boost net income margins next year.
Morgan Stanley expects stocks of well-capitalised banks to hold their value better than those that are less well-funded. "Stronger capitalised banks have outperformed "weaker" by around 36% in Europe - less stark than in US where they have outperformed by about 52%," the analysts wrote.
The bank is optimistic about the stocks of certain "Phoenix" banks, including Royal Bank of Scotland and France's Credit Agricole, which have re-capitalised successfully and may now rise from the ashes.
Morgan Stanley said the credit crunch constitutes the worst crisis to face capital market banks in about 30 years. It will take between six and ten quarters in total for earnings to return to their pre-crisis levels, compared with seven quarters after the dot.com blow-up in 2000-01 and six quarters after the 1989-90 junk bond crisis, the bank said.
Banks are likely to lose between 7.5 and 9.5 quarters worth of pre-crisis earnings. That compares with 4.1 quarters lost during the dot.com crisis and 6.6 quarters in 1989-90, Morgan Stanley said.
Write to tfairless@efinancialnews.com
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